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Canadian Value Investor Prem Watsa Boosts His Stake of Resolute Forest Products

October 26, 2012 | About:
Adding 2.81 percent to his stake of paper production company Resolute Forest Products (RFP), investment Guru Prem Watsa of Toronto-based Fairfax Financial Holdings (FRFHF) now has a shareholding of almost 19 million shares as of the end of this year’s third quarter, according to GuruFocus Real Time Picks.

As Fairfax’s chairman and chief executive officer, Watsa’s strategy for generating returns comes from a “disciplined” focus on underwriting combined with the investment of its assets on a total return basis, described on the company’s profile on the Fairfax website.

Resolute Forest Products currently trades at $12.40 per share, with a market cap of $1.28 billion. Headquartered in Montreal, Quebec, the company’s major products include newsprint, commercial printing papers, market pulp and wood products, as it operates 21 pulp and paper mills and 22 wood product facilities in the U.S., Canada and South Korea.

Despite a reported net loss of $20 million (or $0.20 per share) in Resolute Forest’s second quarter, its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was up 69 percent from the first quarter of this year.

Resolute Forest’s newsprint, coated papers and specialty papers segments all experienced operating income increases for the second quarter compared to its previous quarter, while its market pulp and wood products segments experienced losses of at least $6 million.

The company’s second quarter shortcomings were affected by several factors: a 5-percent decline in shipments for some segments accompanied by seasonally higher volumes, a weaker value of Canadian currency, increases in transaction prices and drops in inventory.

“Keeping with our optimization strategy, we will continue to manage our exposure to export to markets where unfavorable currency fluctuations have created difficult conditions for North American producers,” said Richard Garneau, president and chief executive officer of Resolute Forest Products, in a second quarter news release. “We expect a modest improvement in the coated, specialty and newsprint segments as a result of seasonal demand increases, but the impact of recent newsprint and specialty paper mill restart announcements are creating uncertainty. Based on current conditions, we do not see a meaningful improvement in the pulp segment for the balance of the year."

The company ended the second quarter with about $1 billion of available liquidity, after using cash on hand to repurchase more than 1 million shares of its common stock, a total cost of $12 million.

Resolute Forest Products has scheduled to announce its third quarter financial results on Oct. 30.

Watsa first acquired shares of Resolute in the second quarter of this year, starting with 18.5 million shares. Fairfax is currently 10 percent owner of the company.

Other Gurus who purchased a stake in Resolute in the second quarter include: Donald Smith of Donald Smith & Co., Jim Simons of Renaissance Technologies LLC, Michael Price of MFP Investors LLC, Third Avenue Management and Pioneer Investments.

To view an interview with Prem Watsa highlighted by GuruFocus earlier this month, which was originally published in the winter 2011 Fairfax Financial Newsletter, visit Interview with Prem Watsa of Fairfax Financial Holdings Limited.

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About the author:

Dianne Tordillo
Dianne Tordillo is staff writer for GuruFocus.com. She reports on a variety of financial news, primarily dealing with investor portfolios and stock trades. Her articles also highlight insider trades, as well as the many useful features of GuruFocus.

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